The US economy will tip into a recession next year, according to nearly 70% of leading academic economists polled by the Financial Times.
The latest survey, conducted in partnership with the University of Chicago Booth School of Business’s Initiative on Global Markets, suggests headwinds for the world’s largest economy after one of the fastest rebounds in the history, as the Federal Reserve steps up its efforts to contain the highest inflation in about 40 years.
The US central bank has already embarked on what will be one of the fastest tightening cycles in decades. Since March, it has raised its benchmark policy rate by 0.75 percentage points from levels close to zero.
The Federal Open Market Committee reconvenes Tuesday for a two-day policy meeting, where officials are expected to implement the first consecutive half-point rate hike since 1994 and signal a continuation of that pace until in September at least. .
Nearly 40% of 49 respondents predict the National Bureau of Economic Research – the arbiter of when recessions begin and end – will declare one in the first or second quarter of 2023. A third believe that call will be delayed until in the second half of next year.
The NBER characterizes a recession as a “significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” Only one economist has mentioned a recession in 2022, with the majority predicting monthly job growth between 200,000 and 300,000 on average for the rest of the year. The unemployment rate should stabilize at 3.7%, according to the median estimate for December.
The survey results, which were collected between June 6 and June 9, run counter to the Fed’s position that it can dampen demand without causing significant economic hardship. The central bank predicts that by raising interest rates, employers in the turbulent US labor market will choose to cut historically high job openings rather than lay off staff, which will dampen wage growth.
Jay Powell, the Fed Chairman, conceded that the Fed’s efforts to moderate inflation could cause “some pain”, leading to a “soft” landing that will see the unemployment rate rise “by a few ticks”. But many economists surveyed worry about a worse outcome given the seriousness of the inflation situation and the fact that monetary policy will have to move towards much tighter parameters in the short term to address it.
“It’s not landing a plane on an ordinary airstrip. It’s landing a plane on a tightrope, and the winds are blowing,” said Tara Sinclair, an economist at George University. Washington: “The idea that we’re going to lower incomes just enough and spending just enough to get prices back to the Fed’s 2% target is unrealistic.”
Compared to the February survey, more economists now believe that core inflation, as measured by the personal consumption expenditure price index, will exceed 3% by the end of 2023. Among June respondents, 12% thought the outcome was “very likely”, up from just 4% earlier this year. The share of economists surveyed who thought that level was “unlikely” over the same period has since fallen by almost half.
Geopolitical tensions and the rise in energy costs expected to accompany them have been overwhelmingly cited as the factor likely to keep upward pressure on inflation over the next 12 months, followed by prolonged chain disruptions. supply. At the end of the year, the median estimate of underlying inflation is 4.3%.
Jonathan Wright, an economist at Johns Hopkins University who helped design the survey, said the noticeable pessimism around inflation and growth had stagflationary undertones, though he noted circumstances were fine. different from those of the 1970s, when the term embodied a “much meaner mix”. of high inflation and recession.
Nearly 40% of economists have warned that the Fed will fail to control inflation if it only raises the federal funds rate to 2.8% by the end of the year. That would require half-point rate hikes at each of the next three central bank meetings in June, July and September before returning to its more typical quarter-point cadence for the final two rallies of 2022.
Few respondents expect the Fed to resort to increases of 0.75 percentage points.
Further rate hikes are also likely through next year, says Christiane Baumeister, a professor at the University of Notre Dame, who thinks the Fed could raise its benchmark policy rate as much as 4% in 2023. C is just above the level the majority of economists polled believe will be the peak of this tightening cycle.
Dean Croushore, who was an economist at the Philadelphia branch of the Fed for 14 years, warned that the central bank may eventually have to raise rates to around 5% to contain a problem he said was largely caused by the wait for the Fed “far too long”. ” to take action.
“It’s always hard to get inflation down once you let it out of the bottle,” said Croushore, who now teaches at the University of Richmond. “If they accelerated the rate increases a bit more, it might cause some short-term financial volatility, but they might be better off not having to do so much later on.”